When you're making a retirement plan, there are a few things you really need to get right in order to ensure you end up with enough money to support yourself later in life.
Unfortunately, a recent survey from Goldman Sachs revealed many young workers under the age of 40 are operating under a faulty assumption when they're preparing for the future -- and this mistake could come at a huge cost in terms of their retirement readiness.
Here's the big mistake young workers are making
According to Goldman Sachs' recent report, 30% of workers under the age of 40 believe they will have to replace just 60% of their pre-retirement income -- or less -- after they've left the workforce for good. This means if they were making $70,000 when they left the workforce, they are assuming they'll only require a total of $42,000 at most once they've quit their jobs for good.
This, of course, would mean taking a huge pay cut compared to what they were earning. And while many experts do advise that you won't have to earn quite as much after retiring -- in large part because you'll no longer be devoting additional money to retirement savings -- it will be difficult to reduce your income by so much and maintain anywhere close to the same standard of living.
That's especially true because while some expenses, such as commuting and saving costs, usually go down, others go up. In fact, healthcare alone can cost around $300,000 per couple over the course of retirement. And that's out-of-pocket, beyond what Medicare pays for.
What's the reality of how much you'll spend as a retiree?
Underestimating retirement spending by so much could leave young workers draining their nest eggs too quickly once they find out the realities of their spending habits as seniors.
The good news is, those under 40 who are harboring this misconception have plenty of time to change course. Adjusting your assumptions and increasing savings accordingly can help you salvage your financial security in your later years, but you'll need to know how much income will realistically be required.
Most experts advise replacing around 70% to 80% of pre-retirement income, but even this may not be enough if you want to be absolutely certain you can fund your lifestyle. In fact, according to a recent J.P. Morgan survey, current retirees are spending 90% of their pre-retirement income on average.
It's always better to have too much money than to have an insufficient amount of it. So when making your retirement savings plans, you may want to go with this higher number when estimating your income needs. Now, this doesn't mean you must save enough to replace 90% of what you earned upon retiring. You'll get Social Security benefits, which replace around 40% of your earnings.
That leaves you responsible for coming up with the rest, which means planning for your nest egg to generate enough to replace about 50% of your final salary at a safe withdrawal rate. The sooner you set a realistic savings goal like this and start working toward it, the more likely it will be that you can enjoy your later years without a lot of financial worry.